April 30 (Bloomberg) -- Slovenia delayed a bond sale as its
credit rating was cut to junk by Moody’s Investors Service,
which cited banking-industry “turmoil” and said the government
would have to offer lenders more financial support.

Slovenia postponed an offering of dollar-denominated
benchmark bonds before the rating was lowered two levels to Ba1
from Baa2, on par with Turkey, and given a negative outlook.
Five members of the 17-nation euro area are now rated junk by
Moody’s. Standard & Poor’s and Fitch Ratings both rate Slovenia
at A-, the fourth-lowest investment grade.

“The first key factor underpinning today’s rating action
is the ongoing turmoil in the country’s banking system and the
high likelihood that the sovereign will be required to provide
further assistance and capital injections,” Moody’s said today
in an e-mailed statement from New York. “Asset quality at the
banks deteriorated considerably in 2012 and has continued to
deteriorate since.”

Slovenia, struggling with its second recession since 2009,
is working to fix its ailing banking industry with a 900
million-euro ($1.2 billion) capital boost and the creation of a
so-called bad bank to cleanse lenders’ balance sheets and aid
economic recovery. A detailed overhaul plan is set to be
presented to the European Commission in Brussels by May 9.

Yields Rise

Bond-market history indicates that the utility of sovereign
ratings may be limited. Almost half the time, yields on
government bonds fall when a rating action by S&P and Moody’s
suggests they should climb, according to data compiled by
Bloomberg on 314 upgrades, downgrades and outlook changes going
back as far as the 1970s.

The yield on the government’s dollar note due 2022 rose 11
basis points to 5.75 percent at 7:45 p.m. in Ljubljana. It
peaked at 6.38 percent on March 27 as investors speculated
Slovenia will be the next euro-area country to seek a bailout
after Cyprus.

Slovenia was offering five-year and 10-year dollar bonds
today, according to a person familiar with the matter who asked
not to be identified before the transaction is completed. The
five-year notes were being initially offered in the region of 5
percent and the longer-maturity debt around 6.125 percent, the
person said.

‘Ratings Spiral’

Slovenia “expects the transaction to continue once
additional information is available,” the Finance Ministry
said in an e-mailed statement before the downgrade.

“We highlighted before the risks of a ratings spiral was
an important factor to watch but this is mitigated by the
prospect of issuance still in the near future, perhaps at a
higher spread now,” Peter Attard Montalto, an economist at
Nomura International in London, said by e-mail. “After the
roadshow, the government has a group who knows the country and
wants to buy it and can work with them still to get an issue
away.”

Slovenia’s recovery from a recession that wiped 2.3 percent
off gross domestic product last year is largely down to the
health of the banking industry, according to Moody’s, which
predicted the economy would shrink 1.9 percent in 2013 before
“weak” expansion in 2014. The plan to recapitalize lenders
will cost, between 8 percent and 11 percent of GDP, it said.

“Risks remain skewed firmly to the downside and the
economic outlook will depend to a large degree on the
stabilization of the banking crisis,” Moody’s said.